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The outlook for UK business investment will depend on how households and businesses react to Brexit, a deputy governor of the Bank of England said in a speech today.

In a speech to the Birmingham Chamber of Commerce on Wednesday, Sir Jon Cunliffe, a member of the Monetary Policy Committee, said that business investment in the UK was expected to remain “very weak before picking up”, referring to the Bank’s latest economic forecasts published last week.

“Ultimately, the outlook for business investment, like the outlook for the economy more generally over the forecast period, depends largely on how households and businesses react to Brexit and on the process that accompanies it,” he said.

Sir Jon said that UK productivity had been disappointing since the financial crisis, with productivity levels also low relative to other advanced economies.

Weak productivity growth was “almost certainly” one of the main reasons for weak pay growth in the UK since the crisis, and had been accompanied by a weakness in business investment, he said.

Sir Jon spoke as the Bank published results of a survey of over 1,200 firms looking at whether they “underinvested” by turning away profitable investment opportunities. The deputy governor warned that a “sizeable share” of firms, or one-third of the total, judged that they had invested too little over the past five years, with many of those struggling to receive the full amount of finance they had applied for.

Risk aversion was cited as an obstacle by 70 per cent of the underinvesting firms, which Sir Jon said could be due to “scarring effects” from the crisis, which lowered returns from investment significantly in 2009.

Sir Jon said that the Bank’s expectation as set out in the February inflation report was that the economy would gently slow as higher inflation squeezes households’ real earnings.

“But that’s not the only conceivable scenario,” he cautioned. He said the Bank would be looking in particular at incoming evidence on pay growth, labour market slack, household consumption, inflation expectations and the impact of the lower level of sterling on consumer prices.

“Today, monetary and financial stability is the most important contribution the Bank can make to stable, productive investment,” he concluded. “There is, unfortunately, a great deal of painful experience of the negative impact of high and volatile inflation on investment. And the adverse impact of the recent financial crisis on investment is clear.”

“Investment is an important channel through which monetary policy is transmitted…That is why we are interested in the way firms finance investments and the constraints they may face.”

Copyright The Financial Times Limited 2017. All rights reserved.
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